Invesco Raises Questions on Key Aspects of Zee-Sony Merger Proposal; Says It Benefits Founding Family at the Cost of Other Shareholders
Moneylife Digital Team 11 October 2021
In an open letter to all the 250,000 shareholders of Zee Entertainment Enterprises, on Monday, Invesco Developing Markets Fund, the largest shareholder of Zee, raised several questions over the company's merger proposal with Sony Pictures saying that the transaction is not in the best interest of all shareholders and is benefiting only the promoters who defaulted on bank loans. Invesco also accused the leadership of Zee of “resorting to a reckless public relations campaign in response to the overwhelming demand from shareholders for leadership changes at Zee.”
Invesco said it welcomed all potential strategic alignments, but was concerned over transaction terms (in the merger with Sony Pictures) that would enrich Zee’s founding family at the expense of ordinary shareholders.
It points out that the deal will give an additional 2% shareholding to the founding family, which currently has a mere 4% stake and also provides a pathway for enhancing their stake to as much as 20%. Invesco believes that a better-governed Zee would be more valuable on its own, but also welcomed strategic alignments that would build a stronger media platform.
Invesco Developing Markets Fund reiterated its demand for an overhaul of media major Zee Entertainment’s board and said that it would pursue extraordinary general meeting (EGM) to hold the board and management accountable and bring about the necessary change in the company.
Last month, the Zee board had announced that it had approved a non-binding term sheet with Sony Pictures Networks India to merge their operations.
Under the terms of the deal, Sony will own 53% in the merged company and Punit Goenka will be managing director and chief executive officer (MD & CEO).
The Oppenheimer-backed company said the lack of clarity around key aspects of the Zee-Sony merger announcement should concern all shareholders.
Invesco pointed out that the Zee-Sony announcement casually mentions that the Zee promoter family will have the right to raise their stake from 4% to 20%, without specifying any manner in which this meaningful change will actually happen.
"'Will this change the majority control of Sony in the merged entity? Will it involve open market purchases, warrants, or some other financial instrument? If the latter, will said instruments/warrants to the promoter family be priced so as to advantage them at the cost of ordinary shareholders?" Invesco asked.
"We will gladly evaluate the transaction in a constructive spirit if and when additional information is made available. However, we have also noted the timing of this announcement and its non-binding nature. As a result, we currently consider it to be no more than camouflage on the part of Zee to divert and distract from the primary issues before the company," Invesco said.
Invesco said since its EGM requisition in September, it has witnessed the strange spectacle of Zee’s management, with the support of its current board going to great lengths to deny what Indian law deems a statutory right to ordinary shareholders. "These actions, which ostensibly are being taken in the 'best interests of all shareholders', as Zee’s communications claim, are in fact indicative of a management team that places self-interest over the interest of the institution it leads, its employees and all other shareholders, as well as a Board whose permissive culture has enabled this behaviour and its consequences," Invesco said.
"This is precisely why we believe Zee’s Board needs to be strengthened with independent directors who take their jobs seriously, who robustly debate vital decisions and who serve as guardians of all shareholder interests," the Fund said while reiterating its demand to the Zee board to call an EGM and let the shareholders decide about the fate of the company.
Invesco,which holds a 18%  stake in ZEEL, said the non-binding agreement between ZEE and Sony 'gifts' a 2% equity stake to the promoters of Zee in the guise of a 'non-compete', even though the current MD & CEO of Zee will continue to run the proposed merged entity for the next five years.
"This is dilutive to all other shareholders, which we consider unfair. At the very least, we would expect such largesse to be contingent on the MD/CEO leaving said position (thus raising the scenario of “non-compete”) or be structured in the form of time vesting and performance linked ESOPs, which we as shareholders welcome as a transparent way to reward performance and leadership," Invesco said.
 “As long-term investors and stewards of investor capital, the Invesco Developing Markets team takes its fiduciary duty very seriously and is committed to acting in the best interest of clients and shareholders,” said Justin Leverenz, chief investment officer, developing markets equities at Invesco.
“We have been a significant shareholder in Zee Entertainment Enterprises for over a decade. The depth of talent within Zee gives us conviction that if the company were properly managed, it has the potential for tremendous growth and success. We are disappointed that the leadership of Zee has resorted to a reckless public relations campaign in response to the overwhelming demand from shareholders for leadership changes at Zee,” Mr Leverenz added.
“These actions and rhetoric are aimed at avoiding true accountability for the governance lapses and shareholder value destruction that the current leadership and Board have presided over. We are calling on Zee shareholders to join us in asking why the founding family, which holds under 4% of the company’s shares, should benefit at the expense of the investors who hold the remaining 96%," it said.
Invesco said, as of 31 August 2021, the Invesco Developing Markets strategy held investments totaling $7.7 billion (Rs 56,200 crore approximately) in India – representing about 15.8% of its total assets under management worldwide.
"Our initiative is driven by our belief that the promoter family of Zee, with the support of its current board of directors, continues to evade accountability to its ordinary shareholders, who own 96% of Zee’s equity. This lack of governance oversight by Zee’s current board has permitted Zee’s deep entanglement with the financial distress of its founding family, as identified in SEBI’s letter of 17 June 2021," it said.
"'In this extraordinary regulatory rebuke, SEBI mentioned “large outstanding dues from related parties,” “letters of comfort issued by Directors of the Company without informing the Board,” and alongside other observations, concluded that “actions of the company are not in the best interest of shareholders,” Invesco said and added that these matters are in the public domain and all shareholders are aware of them as they are.
"'We note that on the eve of our EGM requisition, Indian stock market indices had more than doubled in the preceding five years, whereas the stock of Zee had more than halved in the same period. This is a sombre report," it said.
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